3. The classical dichotomy and the neutrality of money The classical dichotomy is the separation of real and nominal variables. The following questions test your understanding of this distinction. Crystal spends all of her money on paperback novels and donuts. In 2014, she earned $12.00 per hour, the price of a paperback novel was $6.00, and the price of a donut was $1.00. Which of the following give the nominal value of a variable? Check all that apply. The price of a donut is $1.00 in 2014. Crystal's wage is $12.00 per hour in 2014. The price of a donut is 0.17 paperback novels in 2014. Which of the following give the real value of a variable? Check all that apply. The price of a paperback novel is 6 donuts in 2014. Crystal's wage is 12 donuts per hour in 2014. The price of a paperback novel is $6.00 in 2014. Suppose that the Fed sharply increases the money supply between 2014 and 2019. In 2019, Crystal's wage has risen to $24.00 per hour. The price of a paperback novel is $12.00 and the price of a donut is $2.00. In 2019, the relative price of a paperback novel is Between 2014 and 2019, the nominal value of Crystal's wage Monetary neutrality is the proposition that a change in the money supply variables. , and the real value of her wage nominal variables and real

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IS-LM-PC Analysis

The IS (Investment Saving), LM (Liquidity Preference- Money Supply), and PC (Philips Curve) is the model that looks at the dynamics of output and inflation. It takes into account the central bank policy decision to adjust the inflation and real interest rate in the economy. It enables the economist to weather to priorities between employment and inflation rate analyzing the model. It is a practice-driven approach adopted by economists worldwide.  

IS-LM Analysis

The term IS stands for Investment, Savings, and LM stands for Liquidity Preference, Money Supply. Therefore, the term IS-LM model is known as Investment Savings – Liquidity preference money Supply. This model was introduced by a Keynesian macroeconomic theory which shows the relationship between the economic goods market and loanable funds market or money market. In other words, it shows how the market for real goods interacts with the financial markets to strike a balance between the interest rate and total output in the macroeconomy. This particular model is designed in the form of a graphical representation of the Keynesian economic theory principle. The output and money are the two important factors in an economy.